A leading economist has added to the growing consensus that euro zone interest rates are unlikely to rise before spring next year. The European Central Bank was in no hurry to raise rates, said NatWest's Global Financial Markets chief economist, Mr Ram Bhagavatula, and this was potentially good news for mortgage holders. A rise from 2.5 per cent to 3.25-3.5 per cent was likely before the end of 2000, he said.
In Dublin for a presentation to corporate clients of Ulster Bank Group Treasury, Mr Bhagavatula said the Irish economy would continue to grow next year. "Ireland is doing very well and I don't see any reason to forecast any significant slowdown." While the Irish economy was second only to the US in terms of tightening capacity in the labour market, he said this was not necessarily a problem. "It's good to have capacity constraints . . . Maybe wages getting stronger is a good thing.
"Policy tightening is now the global story," said Mr Bhagavatula. "Everyone is looking over their shoulders." But while rates in the US and in Britain had increased recently, Mr Bhagavatula said anxiety about inflation does not yet prevail in the euro zone.
He said the ECB's decision on April 8th to lower rates by 0.5 percentage points to 2.5 per cent was an insurance measure. "The initial rise [in spring] will be to recover that insurance policy. Increases beyond that will not come fast and furious."
Stating that the rates are likely to reach between 3.25 and 3.5 per cent by the end of next year, he added: "They're still very moderate interest rates especially in relation to where we were a few years ago."
Predicting continued growth in the euro zone next year, Mr Bhagavatula said this would be stronger in the second half of this year. Growth would be supported by well-contained inflation, the existence of excess capacity in most of the major euro countries and "friendly monetary and fiscal policies". In addition, exports were recovering from the effects of the Asian and Russian crises and governments were no longer cutting spending and increasing taxes.
While there would be "some agony" in US financial markets over interest rates, Mr Bhagavatula said these were not major concerns. "I would expect prices to be still on a rising trend," he said. "The factor that causes stock markets to come down is fear of recession."
Asked about the prospects for the Irish stock market, he said: "I would assume smaller stock markets like Ireland will come back into favour."
Mr Bhagavatula said stock price growth in Ireland and Spain had front-loaded very early in the economic cycle and most of the focus would be on growth in the French and German markets in the short term. "Once the laggard stock markets catch up the smaller markets can be expected to recover.
On exchange rates, Mr Bhagavatula said the euro would rise sharply but not until mid-way through 2000.
